Trends in real estate investing

by Bill Small, Aspen Daily News Columnist
As real estate markets across the country continue to recover, it’s interesting to note some of the trends that will impact investment real estate over the coming years. How investors respond to these trends will separate the winners from the losers in the real estate investment industry. To some degree or another, these trends will impact large cities as well as resort towns like Aspen. If you’re an investor looking at buying properties, you should consider how these trends might impact the property you’re buying. If you’re an owner, these trends may help you decide if selling is a good idea. The following are some of the trends that are most mentioned in commercial investment real estate circles and could potentially have the largest impact.

Trend one: Aging population: About 70 million baby boomers are approaching retirement. The aging of America could dramatically impact real estate markets with some markets growing in population and others declining. It’s also likely to change the demand for certain types of real estate. The need for office space may flatten or decline while the demand in retirement communities may grow dramatically. In addition, as baby boomers retire, they will start withdrawing years’ worth of money from retirement accounts and pension plans potentially reducing the capital available for commercial real estate investing and lending.

Trend two: Online retailing: Online retail sales are projected to reach $250 billion by 2014, or roughly 8 percent of all retail sales. Online retailing is projected to grow by a 10 percent compounded annual rate for the foreseeable future which is significantly faster than in-store sales. As the technology improves, the retailing world a decade from now could look quite different than it does today. This trend could significantly change the role and purpose of physical retailing and the requirements for retail space, and thus the commercial real estate market.

Trend three: Changing office and industrial demand: Technology could radically change the need for office space by reducing office space requirements. This has been a trend that’s been building for the past decade in the same manner as the paperless office that was talked about 20 years ago. With the advent of iPads and other devices, the paperless office may, after all this time, actually become reality. As more employees work from home or on the go with the help of iPhones and iPads and super-powerful laptops, more and more companies may not need to house large numbers of employees in various locations. The people-less office may also be just around the corner.

In the area of industrial real estate, the expansion of the Panama Canal may change the dynamics of warehousing in this country much like the original Panama Canal changed the shipping industry a century ago.

Trend four: Low cap rates: Cap rates for prime commercial investment real estate have recently dropped in many locations to the levels not seen since 2007 just before the beginning of the Great Recession. The historically low lending and bond rates have made real estate investments at low cap rates more attractive again. However, when interest rates start to increase back to historic averages, which they will at some point, and cap rates increase as they will, it’s possible that we could see another disastrous value decline like the one experienced in the commercial real estate industry in the early 90s and post 2007.

Other trends to watch include the likely increase in the capital gains tax from the current 15 percent to perhaps something closer to 24 percent; and the potential lack of liquidity in the capital markets due to new federal capital limitations on banks and the hundreds of billions of dollars of real estate loans that must be refinanced in the next three to seven years. Because real estate tends to be a long-term investment, astute real estate investors should always look over the horizon for the next trends and be able to determine how those trends will impact their investments.


This opinion article is provided by William Small, JD, CCIM, managing director of Frias Luxury Estates, a division of Frias Properties of Aspen. Email him at bill@friasproperties.com.